Never Forget: A Founding CEO's Real Job Is To Find A Repeatable Business Model

As a founder I fought with VC’s over vesting as they brought in a
new CEO and walked me out the door. As a board member I
negotiated with founding CEO’s over vesting when I thought it was
their time to go. At best this is an argument where no one wins,
at worst it’s like a nasty divorce.

I’ll offer that both entrepreneurs and VC’s have the wrong model
for founding CEO equity compensation. The customary vesting model
has founders vest their stock over 4-years, and when the
founding CEO gets in over their head the VC’s bring in
professional management. More often than not the founding CEO
leaves the company. The fallacy is believing that a founders
value is evenly distributed over four years. We now have three
decades of experience that says otherwise.

Preparing For ChaosEvery VC knows that the
founding CEO is the individual you throw into the chaotic battle
of a startup. Investors are praying they’ve backed a founder who
can think creatively and independently, because more often than
not, conditions on the ground change so rapidly that the original
well-thought-out business plan becomes irrelevant. They’re hoping
they funded a CEO who can manage chaos and uncertainty, is biased
for action and isn’t waiting around for someone else to tell them
what to do. They’re betting that the founding CEO can quickly
separate the crucial from the irrelevant, synthesize the output,
and use this intelligence to create islands of order in the
all-out chaos of a startup. And that they’ll emerge from this fog
of war with a scalable business model.

They also know that most founding CEO’s don’t scale past the
early stage.

That’s the source of the trouble. Most founding CEO’s don’t
know that they’re cannon fodder in the search for a business
model.

It’s My Idea and Hard WorkSome founding
CEOs believe the value they bring to their startup is their idea
and the time and energy they put into their company. In their
mind, since they thought of the idea of the company, spec’d the
product, found the first customers and worked their tails off,
they are entitled to vest all their stock over time and run their
company.

Where’s My Liquidity EventSome VC’s feel
that if a startup has grown past the founder’s ability to manage and
scale (and hasn’t had a liquidity event,) they should be able to
remove the founding CEO and (at best) walk them out the door with
only the stock they vested to that day.

It’s About Finding the Business ModelI’ll
posit that both views are wrong. Lets start with what the real
job of the founding CEO’s job is: to find a repeatable and scalable business
model. The goal of your business model can be revenue, or
profits, or users, or click-throughs (or even just to get the
technology into production) – whatever the founders and their
investors have agreed upon.

If you don’t find this business model there is no company.

The odds are if the founder is going to find the first business
model it’s going to be in the first few years. Yet the
traditional vesting model ignores this. It assumes that founders
contributions are linear over 4-years. Not only is this unfair it
has the founding CEO focused on the wrong goal – hanging on as
long as they can to vest their stock. Why on earth would
investors want to have the incentives set up this way? 30 years
of accumulated experience says these perverse incentives actually
diminishes the value of their investment.

It’s time to rethink how we vest stock for founding CEOs.

The New DealThe founding CEO vesting model
should start with a new deal between VC’s and founders.
Recognize that a founder's value is non-linear over 4 years and
heavily weighted towards the chaotic first few years. Agree that
the founder is being rewarded not just for the idea or technology
of the company but rather for finding a way to make money.

Founding CEO’s need to agree that it’s rare that founders are the
right people to take a startup through the transition to build
and scale it into a company. Instead, it’s likely that after they
do the hard work of finding the business model, the company will
need to hire their replacement to grow the company to the next
level.

The New Founding CEO Vesting
ModelTherefore, if the founding CEO gets the
company to a repeatable business model they deserve to vest all
their stock if they are removed. If they fail to find a
business model, by taking investors money they’ve implicitly
agreed they can be walked out the door. (But can keep the stock
they’ve vested to date.) Specifying what the metrics are for a
repeatable business model is what the board and founders should
be doing in the first place. This new deal would keep everyone
focused on the search for the model.

I’ll suggest that this new deal more accurately reflects the
time-weighted contributions that founding CEO’s make and more
accurately aligns founders and investors interests.

Lessons Learned

The job of the startup CEO is to find a repeatable/scalable
business model.

The contribution of the founding CEO is not linear
over 4-years.

If the founding CEO gets the company to a repeatable
business model they deserve to vest all their stock if they are
removed.

Accountants shouldn’t be putting together the vesting
schedule.

Steve Blank teaches entrepreneurship at U.C. Berkeley,
Stanford University and the Columbia University/Berkeley Joint
Executive MBA program. He also wroteabout building
early stage companies in his book,Four Steps to the Epiphany. This post
was
originally published on his blog, and it is republished here
with permission.